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Motorola Inc. must agree to license standard-essential patents (SEPs) to Microsoft Corp., and if the parties cannot come to an agreement, a federal court will force one, the U.S. District Court for the Western District of Washington ruled Oct. 10 (Microsoft Corp. v. Motorola Inc., W.D. Wash., No. 2:10-cv-01823-JLR, 10/10/12).

The court determined that Motorola's agreements with standard-setting organizations (SSOs) to offer a license allows the court to create a license with any third-party beneficiary to the SSOs, including Microsoft.

The judge will determine an appropriate royalty rate as well as a range of reasonable rates. A jury will determine if Motorola's first offer to Microsoft for a license to patents used in the Xbox gaming system was a breach of the patent holder's agreements with the SSOs.

This is the second loss for Motorola in this litigation in two weeks. The U.S. Court of Appeals for the Ninth Circuit upheld Sept. 28 the same district court's decision to issue a preliminary anti-suit injunction, preventing Motorola from enforcing an injunction imposed by a German court against Xbox sales. 28. No. 12-35352, 2012 BL 257618 (9th Cir. Sept. 28, 2012).

Motorola Has Essential IEEE and ITU Patents.

The Institute of Electrical and Electronics Engineers and the International Telecommunication Union are standard-setting organizations that create standards for the interoperability of computing devices. The IEEE's 802.11 is one such standard, related to devices communicating over a wireless local area network (WLAN). The ITU's H.264 standard covers video coding technology.

Microsoft and Motorola are members of both the IEEE and the ITU. As members, each agreed to the IP rights policies of the SSOs.

Each IP policy contains provisions related to SEPs--patents covering technology necessary to meeting the standard such that any device maker using the standard would be infringing. Each policy identifies the patent owner/SSO member's requirement to license SEPs on RAND--reasonable and nondiscriminatory, often FRAND with the word “fair” added--terms.

However, neither policy puts parameters on what would constitute RAND terms, and neither policy requires that a RAND license to one user of the standards must be equivalent to a RAND license to another user.

Each party is the owner of essential patents as to the standards at issue in this case, and each is making infringement claims against the other party. The instant action relates to Motorola's SEPs (7,310,374; 7,310,375; and 7,310,376).

Motorola sent letters to Microsoft offering a license, under RAND terms by Motorola's characterization, “including a reasonable royalty of 2.25% per unit … based on the price of the end product (e.g., each Xbox 360 product) and not on component software.”

The Case So Far.

Two weeks after the second of the letters Motorola sent, Microsoft filed an action in the U.S. District Court for the Western District of Washington for breach of contract by Motorola. Motorola counterclaimed, including a request for declaratory judgment that Microsoft had repudiated or rejected a RAND offer and so is not entitled to a license for the SEPs.

• Motorola entered into binding contractual commitments with the IEEE and the ITU, committing to license its declared-essential patents on RAND terms and conditions; and

• Microsoft is a third-party beneficiary of Motorola's commitments to the IEEE and the ITU.

Microsoft then moved for summary judgment of a breach because the offer was blatantly unreasonable. Motorola moved for summary judgment that Microsoft had repudiated its rights as a third-party beneficiary by failing to negotiate before resorting to litigation.

The court denied both motions and scheduled a trial to begin Nov. 13. It concluded that the court must determine a true RAND royalty rate first.

Nevertheless, Motorola moved to dismiss the case. Motorola first asked the court to modify its construction of the ITU and IEEE agreements such that no licensing agreement between Motorola and Microsoft would exist. Second, Motorola noted that Microsoft never asked the court to create a license between the parties and asked the court to dismiss the complaint accordingly.

Court Is Forum for RAND License Agreement.

The court rejected Motorola's view of the present procedural status of the case. It said that the immediate intent of the Nov. 13 trial is to determine a RAND range and rate. The court will not be modeling any current agreement between the parties, it said, but rather creating a license because of Motorola's actions to date.

“[A]fter examining the language of Motorola's agreements with the ITU and IEEE, the court held that Microsoft is entitled to a RAND license,” the court said. “To be clear, having previously determined that Microsoft has not repudiated or revoked this right, the court's prior holding means that Motorola must grant Microsoft a RAND license to its standard essential patents.”

The court further rejected Motorola's argument that the SSO agreements only require it to negotiate towards a RAND licensing agreement.

“[T]he RAND license must eventually execute between the parties, and interminable good faith negotiation by Motorola will not uphold its end of the bargain,” the court explained. Accordingly, the court continued, “a forum must exist to resolve honest disputes between the patent holder and implementer as to what in fact constitutes a RAND license agreement. Here the courthouse may be the only such forum.”

To perform that function, the court said that it must create “the very license Motorola has promised to grant, [otherwise] Motorola's obligations would be illusory.” The court quoted the Ninth Circuit's Sept. 28 opinion supporting that conclusion: “[I]t is clear that there is a contract, that it is enforceable by Microsoft …. The question is how the commitment to license is to be enforced, not whether the commitment itself is a license.”

The court also addressed Microsoft's failure to plead specifically that the court should establish the agreement. It concluded that even if Microsoft's complaint did not explicitly request an agreement as relief, “Motorola's position in this litigation inherently requires the availability of such relief.”

The court closed by rejecting Motorola's request to rearrange the order of issues at trial to determine breach first. “[T]he court must first determine a RAND royalty range to assist a jury in comparing Motorola's offers to a true RAND range,” the court reasoned.

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